It's that time of the year again. Holiday spending was up another 5% this year to .... get this..... $457.4 Billion. As reported By Parija B. Kavilanz, CNNMoney.com staff writer in the article found here. That's right, billion with a "B". And, once the credit card bills begin to get delivered.... the slaughter will begin. Many might be thinking that I'm going to drone on about the high cost of credit, how long it will take to pay off those credit cards, fees, penalties, etc... Not this time.
The ritual that I'm referring to is mortgage refinancing. Every year thousands of homeowners find themselves in a little trouble with last years spending habits. And this year many people are going to get the old Double Whammy with roughly 12% of adjustable mortgages coming due. Scratching their heads trying to figure out how they will make ends meet, refinancing (or debt consolidation) begins to look appealing. I know, I've been involved in real estate for 20 years, for the last 10 I have actually owned 3 mortgage companies and I can tell you this happens every year... like clockwork.
But here is where it get's a little scary. I like to call the mortgage business "the Wild West". There is no other business where you will find such a wide variety of interest rates and accompanying charges between companies --- for the exact same loan. Please pay attention.... there is only ONE reason for this. Lenders, mortgage companies, brokers, loan originators, loan officers..... GREED. And trust me when I say they are licking their chops waiting for the slaughter to begin.
A lot of consumers try to be smart about getting a home loan. They call 5 different lenders looking at the different rate and fees that each propose. These people "try" to get the best deal for themselves, but little do they know that their efforts will probably be fruitless. Let me summarize the real problem with the mortgage business and consumers getting the best deal.
1. Providing a mortgage should be thought of as a product and not a service. And as a product should have a general worth attached to it --- regardless of the size of the loan provided. Only if people shop for a mortgage based upon how much the mortgage company / lender will make in revenue can they truly get the best deal.
2. Unless you're in the business, it is virtually impossible to determine how much a lender / mortgage company will make off of your transaction. And, let's face it... who has the time or inclination to get super educated on the subject?
What's the solution? More government regulation? Nah, they keep trying, passing more and more regulation each year. To be fair, these regulations have had a share in eliminating the worst of the worst, but hasn't helped a bit for the day-in, day-out ordinary transactions.
Finally, a solution from within the industry itself. What is really needed is some independent, third party advice. Someone without a paycheck riding on the answers. There is at least one web site that promises to do just that. At Free Loan Advice people can download the Free guide titled "The Ultimate Mortgage Shopping Guide". Additionally, they can utilize other resources such as hundreds of articles on virtually every subject having to do with interest rates and mortgages, they can also Ask the Expert for any loan questions they may have. But most importantly this site offersThe Rate and Fee Analyzer, which gives people the answer to the ultimate question.... How much are they making off of me?
This Spam-Free website is 100% Free of any charge and is available to everyone. As web sites like this gain popularity, a fundamental shift in the mortgage industry is underway. The annual "slaughter" will become less and less severe, until one day --- the playing field will be leveled --- and consumers will never again be "taken" by unscrupulous lenders. And, this is all without increased governmental regulation or additional fees of any kind.
Anyone who may be in the market for a refinance or purchase are highly encouraged to check it all out at http://www.freeloanadvice.net
If your family or friends are in the market ... do them a favor and e-mail this article to them as well.
About the Author
With over 20 years in real estate / mortgages, Andrew Bloom has agreed to reveal the true secrets to getting the best possible deal. http://www.freeloanadvice.net is a spam-free site offering genuine, quality mortgage advice that is always 100% Free of any charges.
Wednesday, April 18, 2007
Divorce and Debt
As common sense and statistics tell us, the leading cause of marital discord is money. Therefore, it is not surprising that many times divorce inventories have more red numbers than black ones.
Media sources often portray Hollywood stars of "power couples" divorcing. Included with the typical hype may be which party will get the mansion, vacation home, or car collection, but rarely is there any coverage about how the parties will divide debt.
The hard truth is that debt, just like assets, are included in the community estate. No matter what your own moral compass may register regarding your and your spouse's debt, Texas case law establishes rules that might surprise you. First, debt incurred during the marriage is presumed to be community debt. See Cockerham v. Cockerham, 527 S.W.2d 162, 171 (Tex. 1975). There must be a sufficient amount of evidence to rebut this presumption.
Despite well established case law, Texas divorce decrees contain sections entitled "Debt to Husband" and "Debt to Wife", which seemingly assign responsibility for each debt. These sections of the decree will identify each creditor, the account number, and account balance. At the close of the divorce proceedings, the divorced couple has a lengthy document called a final decree of divorce. The husband, wife, their attorneys, and the judge sign the final decree. Often times the parties order a certified copy of their divorce decree, throw it in a drawer or the safe deposit box, and rarely look at it again unless there are children and custody issues involved.
It may be months or years later when the phone rings and one of the parties is greeted by the monotone utterances of a bill collector reading a script off the computer screen. The dialogue may go something like this:
Bob the Bill Collector: "This is Bob with XYZ Visa. I'm calling because your account is 60 days past due, and I need to know when you plan to remit the past due amount and begin making payments."
You: "What are you talking about? That's my ex's account. Our divorce decree says so. I haven't been married to him/her in over (whatever time frame)! Call that deadbeat for the money."
Bob: "Well, Mr. or Ms. So and So, that doesn't mean you don't owe the debt if your ex defaults."
You: "I have a certified court order signed by me, my ex, our attorneys, and the judge saying that I don't owe you anything for that account. That account is the ex's problem. When you find him/her, let me know because he/she owes me money, too!"
Bob: "Your divorce decree might say you aren't responsible, but the law says you are. Why don't you give me a check by phone and we can get you on a payment plan."
You: "Are you dense?! Did you hear anything I just said?! I'm not responsible and I'm not paying you one red cent on any of that debt. Call the ex but stop hounding me!"
Bob: "Mr. or Ms. So and So, I did hear you, and you're wrong. No matter what your divorce decree says, you owe XYZ Visa. If you don't begin making payments, XYZ Visa will report this delinquent account to the credit reporting agencies, and take action up to and including litigation."
I'll let you fill in the closing dialogue for yourself. You are angry and hang up the phone. You may think that Bob, located at some call center hundreds of miles away, has no idea what he's talking about.
As unsettling as it may be, Bob is right. Unless the XYZ Visa was a party to your divorce suit and agreed to the terms of the final decree, you owe the money. It is highly unusual for a husband and wife or their attorneys to implead creditors into divorce actions due to complex legal issues such as jurisdiction and venue on both the state and federal level.
To understand how you could possibly be responsible for debt assigned to your ex, you must rewind to the point in time when the credit account was opened. You will need to look at the original account agreement. Almost no one keeps those documents, so order a copy of your credit report from one of the big three credit reporting agencies (EquiFax, Experian, or TransUnion). If the account shows up on your report, then you were more than likely a party to the credit agreement. Despite how the divorce decree allocates the debts (both secured and unsecured), the Court has no authority to modify the contractual obligations between the spouses and the creditor.
To say it another way, the court cannot take away the creditor's right to proceed against either spouse(s) for payment of a community debt that was incurred prior to the decree. See Blake v. Amoco Fed. Credit Union, 900 S.W.2d 108 (Tex. App. - Houston [14th Dist.] 1995, no writ).
Let's presume the account was originally opened in both your names and the creditor was looking to both you and your spouse's income and assets to repay the obligation. This means that you are both responsible for the debt. But what about the divorce decree that spells out which assets and liabilities you and your ex were assigned? Is it a worthless piece of paper? No.
You will not be able to file a motion to enforce the divorce decree to get the defaulting spouse to pay the debt. An enforcement action will only assist if there was specific property, such as a vehicle, brokerage account, or personal property, the other spouse failed to turn over. But what about the debt? All is not lost. You could file an action for breach of contract against the defaulting spouse. The divorce decree is a binding contract that both parties voluntarily signed before the court.
If your ex has defaulted on one or multiple obligations, a suit for breach of contract may be cold comfort. As the old saying goes, you can't squeeze blood from a turnip. Nevertheless, if you pursue this option, your damages may include any money you agreed to pay the creditor to keep the account out of collections, interest, and other miscellaneous expenses, such as attorney's fees if any are incurred.
Depending on the size of the debt that the defaulting party hasn't paid, you could seek relief in small claims court. Texas small claims courts have jurisdiction from $0.01 up to $5,000.00. These courts are designed for individuals who want to represent themselves and avoid hiring an attorney. This is where people go to argue the "do right" law. However, if the amount in controversy is greater than $5,000.00, then you must file suit in a county court, county court at law, or a district court with jurisdiction over the matter. At this point, you may consider hiring an attorney to prosecute the claim if there's a reasonable possibility you could collect from the defaulting spouse. If possible, never let things get to this point by utilizing some of the suggestions outlined below.
Before you go to court or sign the final decree of divorce, you should research each and every account that the decree references no matter if that account falls under the "Husband" or "Wife" section. You both need to be aware how the accounts were established, and who and what the creditor deems liable. It may be in your best interests to refinance jointly held debt and establish the debt in each individual's name if that is possible. If you or your spouse's credit score is not strong enough to take this route, then you may consider liquidating assets to repay the debt before the divorce is final and close the account. It will be cold comfort to pay off a debt only to find out that your ex ran up a bunch of charges. A method may be to sell a car, a house, real property, or take a 401-K loan prior to finalizing the divorce to pay off debt. Because a mortgage and car loan can have long terms of payments, it may behoove you to sell those assets and let the other party acquire them on his or her own credit. By paying off those assets, those will no longer appear as debts on your credit report or create potential future problems if the other party fails to make payments to the creditor.
After your divorce is final, you may consider taking these actions:
1. Closing all joint accounts with a low balance or zero balance. 2. Request a credit report from one of the big three credit reporting agencies 90 days after the divorce is final. Look for any errors or discrepancies and aggressively challenge them in writing. 3. Ask each creditor to send you a duplicate notice for the joint accounts - even if the ex was assigned this account. Monitor to ensure that payments are being made on a regular, timely basis. 4. Make an offer for accord and satisfaction - basically, offer the creditor an amount of money in exchange for a release of your liability on the account assigned to your ex. 5. Communicate with the big three credit reporting agencies to notify them of the divorce and any name changes. 6. Create a debt reduction plan. There are many excellent resources available, such as Consumer Credit Counseling Services, Dave Ramsey, or a church based debt reduction plan.
Bottom line - your credit score is an asset just like your home or car. In fact, if you don't have a good credit score, your ability to obtain consumer or business financing may be extremely limited.
Shannon Cavers provides more divorce information and articles at Houston Divorce Lawyer
About the Author
Shannon Cavers is a Houston, Texas based lawyer practicing in divorce, family law and probate. Houston Divorce Lawyer
Media sources often portray Hollywood stars of "power couples" divorcing. Included with the typical hype may be which party will get the mansion, vacation home, or car collection, but rarely is there any coverage about how the parties will divide debt.
The hard truth is that debt, just like assets, are included in the community estate. No matter what your own moral compass may register regarding your and your spouse's debt, Texas case law establishes rules that might surprise you. First, debt incurred during the marriage is presumed to be community debt. See Cockerham v. Cockerham, 527 S.W.2d 162, 171 (Tex. 1975). There must be a sufficient amount of evidence to rebut this presumption.
Despite well established case law, Texas divorce decrees contain sections entitled "Debt to Husband" and "Debt to Wife", which seemingly assign responsibility for each debt. These sections of the decree will identify each creditor, the account number, and account balance. At the close of the divorce proceedings, the divorced couple has a lengthy document called a final decree of divorce. The husband, wife, their attorneys, and the judge sign the final decree. Often times the parties order a certified copy of their divorce decree, throw it in a drawer or the safe deposit box, and rarely look at it again unless there are children and custody issues involved.
It may be months or years later when the phone rings and one of the parties is greeted by the monotone utterances of a bill collector reading a script off the computer screen. The dialogue may go something like this:
Bob the Bill Collector: "This is Bob with XYZ Visa. I'm calling because your account is 60 days past due, and I need to know when you plan to remit the past due amount and begin making payments."
You: "What are you talking about? That's my ex's account. Our divorce decree says so. I haven't been married to him/her in over (whatever time frame)! Call that deadbeat for the money."
Bob: "Well, Mr. or Ms. So and So, that doesn't mean you don't owe the debt if your ex defaults."
You: "I have a certified court order signed by me, my ex, our attorneys, and the judge saying that I don't owe you anything for that account. That account is the ex's problem. When you find him/her, let me know because he/she owes me money, too!"
Bob: "Your divorce decree might say you aren't responsible, but the law says you are. Why don't you give me a check by phone and we can get you on a payment plan."
You: "Are you dense?! Did you hear anything I just said?! I'm not responsible and I'm not paying you one red cent on any of that debt. Call the ex but stop hounding me!"
Bob: "Mr. or Ms. So and So, I did hear you, and you're wrong. No matter what your divorce decree says, you owe XYZ Visa. If you don't begin making payments, XYZ Visa will report this delinquent account to the credit reporting agencies, and take action up to and including litigation."
I'll let you fill in the closing dialogue for yourself. You are angry and hang up the phone. You may think that Bob, located at some call center hundreds of miles away, has no idea what he's talking about.
As unsettling as it may be, Bob is right. Unless the XYZ Visa was a party to your divorce suit and agreed to the terms of the final decree, you owe the money. It is highly unusual for a husband and wife or their attorneys to implead creditors into divorce actions due to complex legal issues such as jurisdiction and venue on both the state and federal level.
To understand how you could possibly be responsible for debt assigned to your ex, you must rewind to the point in time when the credit account was opened. You will need to look at the original account agreement. Almost no one keeps those documents, so order a copy of your credit report from one of the big three credit reporting agencies (EquiFax, Experian, or TransUnion). If the account shows up on your report, then you were more than likely a party to the credit agreement. Despite how the divorce decree allocates the debts (both secured and unsecured), the Court has no authority to modify the contractual obligations between the spouses and the creditor.
To say it another way, the court cannot take away the creditor's right to proceed against either spouse(s) for payment of a community debt that was incurred prior to the decree. See Blake v. Amoco Fed. Credit Union, 900 S.W.2d 108 (Tex. App. - Houston [14th Dist.] 1995, no writ).
Let's presume the account was originally opened in both your names and the creditor was looking to both you and your spouse's income and assets to repay the obligation. This means that you are both responsible for the debt. But what about the divorce decree that spells out which assets and liabilities you and your ex were assigned? Is it a worthless piece of paper? No.
You will not be able to file a motion to enforce the divorce decree to get the defaulting spouse to pay the debt. An enforcement action will only assist if there was specific property, such as a vehicle, brokerage account, or personal property, the other spouse failed to turn over. But what about the debt? All is not lost. You could file an action for breach of contract against the defaulting spouse. The divorce decree is a binding contract that both parties voluntarily signed before the court.
If your ex has defaulted on one or multiple obligations, a suit for breach of contract may be cold comfort. As the old saying goes, you can't squeeze blood from a turnip. Nevertheless, if you pursue this option, your damages may include any money you agreed to pay the creditor to keep the account out of collections, interest, and other miscellaneous expenses, such as attorney's fees if any are incurred.
Depending on the size of the debt that the defaulting party hasn't paid, you could seek relief in small claims court. Texas small claims courts have jurisdiction from $0.01 up to $5,000.00. These courts are designed for individuals who want to represent themselves and avoid hiring an attorney. This is where people go to argue the "do right" law. However, if the amount in controversy is greater than $5,000.00, then you must file suit in a county court, county court at law, or a district court with jurisdiction over the matter. At this point, you may consider hiring an attorney to prosecute the claim if there's a reasonable possibility you could collect from the defaulting spouse. If possible, never let things get to this point by utilizing some of the suggestions outlined below.
Before you go to court or sign the final decree of divorce, you should research each and every account that the decree references no matter if that account falls under the "Husband" or "Wife" section. You both need to be aware how the accounts were established, and who and what the creditor deems liable. It may be in your best interests to refinance jointly held debt and establish the debt in each individual's name if that is possible. If you or your spouse's credit score is not strong enough to take this route, then you may consider liquidating assets to repay the debt before the divorce is final and close the account. It will be cold comfort to pay off a debt only to find out that your ex ran up a bunch of charges. A method may be to sell a car, a house, real property, or take a 401-K loan prior to finalizing the divorce to pay off debt. Because a mortgage and car loan can have long terms of payments, it may behoove you to sell those assets and let the other party acquire them on his or her own credit. By paying off those assets, those will no longer appear as debts on your credit report or create potential future problems if the other party fails to make payments to the creditor.
After your divorce is final, you may consider taking these actions:
1. Closing all joint accounts with a low balance or zero balance. 2. Request a credit report from one of the big three credit reporting agencies 90 days after the divorce is final. Look for any errors or discrepancies and aggressively challenge them in writing. 3. Ask each creditor to send you a duplicate notice for the joint accounts - even if the ex was assigned this account. Monitor to ensure that payments are being made on a regular, timely basis. 4. Make an offer for accord and satisfaction - basically, offer the creditor an amount of money in exchange for a release of your liability on the account assigned to your ex. 5. Communicate with the big three credit reporting agencies to notify them of the divorce and any name changes. 6. Create a debt reduction plan. There are many excellent resources available, such as Consumer Credit Counseling Services, Dave Ramsey, or a church based debt reduction plan.
Bottom line - your credit score is an asset just like your home or car. In fact, if you don't have a good credit score, your ability to obtain consumer or business financing may be extremely limited.
Shannon Cavers provides more divorce information and articles at Houston Divorce Lawyer
About the Author
Shannon Cavers is a Houston, Texas based lawyer practicing in divorce, family law and probate. Houston Divorce Lawyer
Real Estate Short Sales
It was a real estate boom like no other. Interest rates were dropping incredibly, homes were garnishing appreciation by the week, the stock market wasn't moving and first time home buyers were getting their piece of the American dream. Mortgage brokers, Real Estate Agents and New Home builders were raking in the cash. It seemed like it would never end. Month after month, year after year the sales of new and existing homes climbed. Investors threw their money into the housing market and then as fast as it came it went thud.
The thud started around November of 2006. It started incrementally with a slower than expected August, a quiet November and the news articles started to reflect which was inevitably going to commence. In January of 2007 the Real Estate Taxes were due and crash it went. What seems to be happening now is a rush to unload. From the outside looking in you can see the stock market rise as the housing market falls. New home builders with still a glimmer of hope increase the price of new homes yet offering larger than expected home incentives. Upgrades galore, creative financing, buyers agents bonuses and yet they continue to build on the land they have allocated for future expansion. If it seems familiar, it is. It has an uncanny sense of 1983 all over again.
How did this happen and what makes this housing thud different from the last? There are some minor differences that make this more unique than the last housing crash. Back in the 80's interest rates were at sometimes 16%. At that point it made sense to try to assume a mortgage that was a lower interest rate and throw your cash into their equity. But it wasn't realized equity. It was an inflated sense of a market share. As prices dropped home owners found they were in an over valued situation and as the job market suffered they could no longer pull their money out of their house to move on with their lives. It caused a ripple affect of people walking away from thousands of dollars just to save what they had left. Real estate was sold at auction in a manner that you would buy livestock or sheriff's sales and the late night infomercials were non-stop. "No Money Down" was the catch phrase. You can still find those publications that cite 20% interest rates and how finding a home with a 10% interest rate was a real steal.
So what happened in the last decade? Feeding on that premise that no money down is something of a desired situation and interest rates dropping most people would assume the best investment was their home. Out the window went the premise of paying down your note and having a secure position in your most valued asset. For some time it was just a matter of the educated investor refinancing a higher note and gaining equity in their home just by dropping their interest rate. It was a normal progression of an intelligent move. Refinancing could shorten the length of your home loan in some instances by 15 years and also lower your monthly payment. And then arose the hungry new home builder, the starving loan officer competing in a new market and the incredible increase of Real Estate Agents flooding the market.
Here's how it worked. In most instances this was a first time home buyer. They were to purchase a house no money down. There would be two loans. The 80% back loan that was a fixed rate of sometimes as low as 5% and then the front loan. The front loan represented the 20% down that was typically the homeowner's down payment. That 20% loan was an adjustable rate mortgage that was incrementally to increase over 5 years and then a balloon was to sit waiting at the end. The buyer confused by all this new jargon would ask, and then what? It was explained with the advent of interest rates dropping it was standard practice at that point to refinance that loan with another fixed rate loan or refinance the entire note at one fixed rate. It became such a standard practice that the next step made even less sense. Why not just incorporate your closing costs as well? And they did. Up to 6% of your closing costs could be rolled back into your loan. The buyer would ask what their monthly payment was and assumed that was an affordable note and there you have it. It was a disaster waiting to happen.
The second victim was the investor. The investor that in most instances was watching their money sit either in CD's that showed a dropping interest rate or a stock market that refused to move. The investor would buy these new homes with incredible incentives and it was explained that the home had these upgrades to the standard built home, the home would ofcourse appreciate to where they could sell in 5 years and realize the equity of a moving home market, and then reinvest. They even came with appliances so that they could rent them immediately. Could there be a catch?
So here's where it all plays out now. The new home buyer is in the home of their dreams. And the interest rates instead of dropping are now increasing. So incrementally their payment increases. Then to add insult to injury the home they purchased had an estimated tax base of an empty lot. So the taxes figured at closing were estimated on a fraction of the value of completed construction. Here comes the new appraisal on completed construction and your tax base increases by 150%. These new home buyers revisit that 20% loan and notice that the note is coming due. Struggling to understand the increase in their monthly mortgage payment, coming up with the added cash for their balloon, compounded with the increase in gas and consumable goods is overwhelming. So, as suggested by their loan officer they search to refinance.
What was not explained to them is with the rush of foreclosures on the market and millions of people in the same situation, you must have equity to refinance. You must show the ability to be able to support your note. And they are turned away.
The investor finds themselves in a new subdivision competing with new home sales and no equity. The builder has built in their contract that they can not erect a sign in their yard advertising the property for sale until the subdivision is completed. There are not to hang a lock box on the door. So basically they must rely on the local MLS to market their property. To add insult to injury now the new homes are selling the exact same house they purchased 2 to 5 years earlier for less than they purchased it and adding more upgrades and incentives to new home buyers.
This created a flood of foreclosures on the market. People frustrated are electing to walk away from the home and their good credit rating. Lenders are found at the court house steps now purchasing these homes, fixing them up and reselling them. In some instances the homes are not even rehabbed but placed back on the market sold "as-is, where-is". That would be the new catch phrase.
In order to circumvent the costs of the foreclosure the lending market created an alternative for a homeowner to stop their foreclosure. This system has now been name a "short sale" or a "pre-foreclosure". The short sale is handled this way. The homeowner without any equity in their home approaches the mortgage company and requests a short sale. They are to fill out financial information substantiating that they are no longer able to pay the note. Upon acceptable of the package the home is then listed by a real estate agent on the local MLS and marketing as a "short-sale" or "pre-foreclosure". The offers are then submitted directly to the lender and the lender will make the decisive move as to whether to accept the offer or renegotiate. The homeowner at this point is nothing more than a signature on the listing agreement or the closing statement.
Once the lender comes to an agreement with a prospective buyer the closing date is set and the house changes hands. In most instances the loan is reported as being satisfied and the homeowner now can relax and move to a more comfortable situation. There are floods of new seminars on purchasing property in this type of distressed situation and even though it is a reliable way to purchase property the best case scenario is ofcourse an end user. This is a particularly good way for a home buyer to purchase a property in relatively good condition for a discounted price.
As a real estate agent in the Houston area I have found it difficult to find documentation to send my sellers to to educate them in the process. Most websites are about buying real estate in a short sale situation but I have been limited in finding documentation to support how you would sell such home. Henceforth the publication of this article.
About the Author
Linda Landman is a Real Estate agent in Richmond Texas, 30 miles outside of Houston. She specializes in Land and Short Sales.
The thud started around November of 2006. It started incrementally with a slower than expected August, a quiet November and the news articles started to reflect which was inevitably going to commence. In January of 2007 the Real Estate Taxes were due and crash it went. What seems to be happening now is a rush to unload. From the outside looking in you can see the stock market rise as the housing market falls. New home builders with still a glimmer of hope increase the price of new homes yet offering larger than expected home incentives. Upgrades galore, creative financing, buyers agents bonuses and yet they continue to build on the land they have allocated for future expansion. If it seems familiar, it is. It has an uncanny sense of 1983 all over again.
How did this happen and what makes this housing thud different from the last? There are some minor differences that make this more unique than the last housing crash. Back in the 80's interest rates were at sometimes 16%. At that point it made sense to try to assume a mortgage that was a lower interest rate and throw your cash into their equity. But it wasn't realized equity. It was an inflated sense of a market share. As prices dropped home owners found they were in an over valued situation and as the job market suffered they could no longer pull their money out of their house to move on with their lives. It caused a ripple affect of people walking away from thousands of dollars just to save what they had left. Real estate was sold at auction in a manner that you would buy livestock or sheriff's sales and the late night infomercials were non-stop. "No Money Down" was the catch phrase. You can still find those publications that cite 20% interest rates and how finding a home with a 10% interest rate was a real steal.
So what happened in the last decade? Feeding on that premise that no money down is something of a desired situation and interest rates dropping most people would assume the best investment was their home. Out the window went the premise of paying down your note and having a secure position in your most valued asset. For some time it was just a matter of the educated investor refinancing a higher note and gaining equity in their home just by dropping their interest rate. It was a normal progression of an intelligent move. Refinancing could shorten the length of your home loan in some instances by 15 years and also lower your monthly payment. And then arose the hungry new home builder, the starving loan officer competing in a new market and the incredible increase of Real Estate Agents flooding the market.
Here's how it worked. In most instances this was a first time home buyer. They were to purchase a house no money down. There would be two loans. The 80% back loan that was a fixed rate of sometimes as low as 5% and then the front loan. The front loan represented the 20% down that was typically the homeowner's down payment. That 20% loan was an adjustable rate mortgage that was incrementally to increase over 5 years and then a balloon was to sit waiting at the end. The buyer confused by all this new jargon would ask, and then what? It was explained with the advent of interest rates dropping it was standard practice at that point to refinance that loan with another fixed rate loan or refinance the entire note at one fixed rate. It became such a standard practice that the next step made even less sense. Why not just incorporate your closing costs as well? And they did. Up to 6% of your closing costs could be rolled back into your loan. The buyer would ask what their monthly payment was and assumed that was an affordable note and there you have it. It was a disaster waiting to happen.
The second victim was the investor. The investor that in most instances was watching their money sit either in CD's that showed a dropping interest rate or a stock market that refused to move. The investor would buy these new homes with incredible incentives and it was explained that the home had these upgrades to the standard built home, the home would ofcourse appreciate to where they could sell in 5 years and realize the equity of a moving home market, and then reinvest. They even came with appliances so that they could rent them immediately. Could there be a catch?
So here's where it all plays out now. The new home buyer is in the home of their dreams. And the interest rates instead of dropping are now increasing. So incrementally their payment increases. Then to add insult to injury the home they purchased had an estimated tax base of an empty lot. So the taxes figured at closing were estimated on a fraction of the value of completed construction. Here comes the new appraisal on completed construction and your tax base increases by 150%. These new home buyers revisit that 20% loan and notice that the note is coming due. Struggling to understand the increase in their monthly mortgage payment, coming up with the added cash for their balloon, compounded with the increase in gas and consumable goods is overwhelming. So, as suggested by their loan officer they search to refinance.
What was not explained to them is with the rush of foreclosures on the market and millions of people in the same situation, you must have equity to refinance. You must show the ability to be able to support your note. And they are turned away.
The investor finds themselves in a new subdivision competing with new home sales and no equity. The builder has built in their contract that they can not erect a sign in their yard advertising the property for sale until the subdivision is completed. There are not to hang a lock box on the door. So basically they must rely on the local MLS to market their property. To add insult to injury now the new homes are selling the exact same house they purchased 2 to 5 years earlier for less than they purchased it and adding more upgrades and incentives to new home buyers.
This created a flood of foreclosures on the market. People frustrated are electing to walk away from the home and their good credit rating. Lenders are found at the court house steps now purchasing these homes, fixing them up and reselling them. In some instances the homes are not even rehabbed but placed back on the market sold "as-is, where-is". That would be the new catch phrase.
In order to circumvent the costs of the foreclosure the lending market created an alternative for a homeowner to stop their foreclosure. This system has now been name a "short sale" or a "pre-foreclosure". The short sale is handled this way. The homeowner without any equity in their home approaches the mortgage company and requests a short sale. They are to fill out financial information substantiating that they are no longer able to pay the note. Upon acceptable of the package the home is then listed by a real estate agent on the local MLS and marketing as a "short-sale" or "pre-foreclosure". The offers are then submitted directly to the lender and the lender will make the decisive move as to whether to accept the offer or renegotiate. The homeowner at this point is nothing more than a signature on the listing agreement or the closing statement.
Once the lender comes to an agreement with a prospective buyer the closing date is set and the house changes hands. In most instances the loan is reported as being satisfied and the homeowner now can relax and move to a more comfortable situation. There are floods of new seminars on purchasing property in this type of distressed situation and even though it is a reliable way to purchase property the best case scenario is ofcourse an end user. This is a particularly good way for a home buyer to purchase a property in relatively good condition for a discounted price.
As a real estate agent in the Houston area I have found it difficult to find documentation to send my sellers to to educate them in the process. Most websites are about buying real estate in a short sale situation but I have been limited in finding documentation to support how you would sell such home. Henceforth the publication of this article.
About the Author
Linda Landman is a Real Estate agent in Richmond Texas, 30 miles outside of Houston. She specializes in Land and Short Sales.
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